Question

Universal Foods issued 12% bonds, dated January 1, with a face amount of $225 million on January 1, 2021. The bonds mature on December 31, 2030 (10 years). The market rate of interest for similar issues was 14%. Interest is paid semiannually on June 30 and December 31. Universal uses the straight-line method. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Determine the price of the bonds at January 1, 2021.
2. to 4. Prepare the journal entries to record their issuance by Universal Foods on January 1, 2021, interest on June 30, 2021 and interest on December 31, 2028.

Answer 1

1.

Par value of bonds = $225,000,000

Semi annual interest payment = 225,00,000 x 12% x 6/12

= $13,500,000

Effective interest rate = 14%

Semi annual Effective interest rate = 7%

Present value of principal to be received at the maturity = Par value of bonds x Present value factor (r%, n)

= 225,000,000 x Present value factor (7%, 20)

= 225,000,000 x 0.25842

= $58,144,500

Present value of interest to be received periodically over the term of the bonds = Interest x Present value annuity factor (r%, n)

= 13,500,000 x Present value annuity factor (7%, 20)

= 13,500,000 x 10.59401

= $143,019,135

Present value of bond = Present value of principal to be received at the maturity + Present value of interest to be received periodically over the term of the bonds

= 58,144,500 + 143,019,135

= $201,163,635

Price of the bonds at January 1, 2021 = $201,163,635

2. to 4

Discount on bonds payable = Par value of bonds - Issue price of bonds

= 225,000,000 - 201,163,635

= $23,836,365

Date	Cash paid	Interest expense	Change in carrying value	Carrying value
1/1/21				201,163,635
6/30/21	13,500,000	201,163,635 x 7% = 14,081,454	14,081,454 - 13,500,000 = 581,454	201,163,635 + 581,454 = 201,745,089
12/31/21	13,500,000	201,745,089 x 7% = 14,122,156	14,122,156 - 13,500,000 = 622,156	201,745,089 + 622,156 = 202,367,245

2.

Journal

January 1, 2021	Cash	201,163,635
	Discount on bonds payable	23,836,365
	Bonds payable		225,000,000
June 30, 2021	Interest expense	14,081,454
	Discount on bonds payable		581,454
	Cash		13,500,000
Dec. 31, 2021	Interest expense	14,122,156
	Discount on bonds payable		622,156
	Cash		13,500,000